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Several characteristics of                                         tangible fixed assets. Intellectual capital
                                                                             encompasses the intangible, nonphysical
          intellectual capital make it                                       assets represented by customer
                                                                             relationships, product/service
          difficult to determine a fair value.                               propositions, processes, innovations,
                                                                             supplier relationships, employees, and
                                                                             digital capability, which are employed in
                                                                             combination by the business to create
                                                                             synergies that drive future value creation.
                                                                               Value creation is dependent on the
          Improved understanding can lead to both   earnings growth and a return on invested   growth rate (g), ROIC, and WACC in
          improved actual performance and   capital (ROIC) exceeding the weighted   combination with the net operating profit
          increased certainty about future   average cost of capital (WACC) that is   after tax (NOPAT). Value is always created
          performance, both factors leading to   funding that business. Funding of this   when ROIC is improved. However, growth
          increased business value.        invested capital is provided by debt and   will only lead to value creation when ROIC
                                           equity capital (see the chart “Funding   exceeds WACC. With simplifying
          Value creation — a technical     Providers’ Value Creation”).      assumptions of a constant growth and
          perspective                         Invested financial capital represents   ROIC rates, according to McKinsey & Co’s
          Value is created by employing both the   the retained value created from the   guide, Valuation: Measuring and Managing
          financial and intellectual capital of a   business’s historic performance and   the Value of Companies (Seventh Edition),
          business to generate a combination of   comprises net working capital and   this relationship can be represented by the


          Funding providers’ value creation


                                                     Invested capital





                                              Financial          Intellectual
                                               capital             capital


                                                   Operating cycle
                                                                                Return on
                                         Investment                             invested capital
                                            rate

                                                      Growth rate
                                                      Net operating
                     Funding cycle                   profit after tax



                                     Cost of debt                      Cost of equity   Release of
                       Investment       capital         Weighted          capital       assets to
                       into assets                    average cost                      reduce
                                                        of capital                      funding


                                     Debt capital                      Equity capital






                                                        Funding


                     Figure 1:  Funding providers’ value creation
          28  I  FM MAGAZINE  I  February 2022
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